The Screaming Pen

Providing Global Insight, Context, and Perspective

Oil, Gold, ETFs, Oh My!

“Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die in euphoria.”

– Sir John Templeton
The financial media’s obsession du jour of rising commodity prices has resulted in a frenzy of investing by amateurs seeking the high returns that they cannot seem to capture in the current lackluster American equity market. A recent article in the Financial Times mentions that pension funds in the United Kingdom have been pouring record amounts of money into the commodities markets. ETFs that allow investors to bet on the price of oil and gold have been opening at a record pace, as news conscious investors are afraid that they will miss the boat on the commodities boom.

While it is possible that long term factors such as rising world demand for commodities, along with shorter term factors such as the current situations in Iran and Nigeria will cause increases in the price of oil and other commodities over time, it is foolish to believe that the current bull market for commodities, especially oil, will continue forever without experiencing a price correction. There is a distinct possibility that we may be in for a short term bear market within a secular long term commodities bull market , especially for oil. For today’s discussion we will focus on oil prices, as it is a topic receiving heavy attention in the American media right now.

source: Oilenergy.com

Graph: Notice that the current bull market for light, sweet, crude is longer in duration and greater in magnitude than other historical booms, most notably the one that occurred in the mid 1970s.

Smart investors are aware that the time to buy into an asset class is when that asset class is out of favor with other investors, not when it is experiencing record returns. Logic tells you that the time to invest in an oil ETF would have been in the late 1990s, when oil prices were low. It is apparent that the global herd of investors are acting illogically and this is where the smart investor will recognize and seize opportunities. It is possible that the same people who saw opportunities at the height of the tech bubble in 2000 and lost money, are some of the same people who are buying into Oil and Gold ETFs right now. Although past performance is not indicative of future results, we may be experiencing a price ceiling right now, which would be negative for those who recently bought into oil, but good for the price of gasoline at the pump.

-JPL

 2006. All rights reserved.

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May 7, 2006 - Posted by | Author: JPL, Oil, Uncategorized

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